Evaluating the usefulness of forecasts of relative growth

Forecasts of differences in growth between countries serve an important role in the justification of governments’ fiscal policy stances, but are not tested for their accuracy as part of the current range of forecast evaluation methods. This paper examines forecasted and outturn growth differentials between countries to identify if there is usefulness in forecasts of “relative” growth. Using OECD forecasts and outturn values for GDP growth for (combinations of) the G7 countries between 1984 and 2010, the paper finds that the OECD’s success in predicting the relative growth of G7 countries during this period is good. For each two-country combination results indicate that relative growth forecasts are less useful for countries which have smaller outturn growth differentials.

Model Uncertainty in Panel Vector Autoregressive Models.

We develop methods for Bayesian model averaging (BMA) or selection (BMS) in Panel Vector Autoregressions (PVARs). Our approach allows us to select between or average over all possible combinations of restricted PVARs where the restrictions involve interdependencies between and heterogeneities across cross-sectional units. The resulting BMA framework can find a parsimonious PVAR specification, thus dealing with overparameterization concerns. We use these methods in an application involving the euro area sovereign debt crisis and show that our methods perform better than alternatives. Our findings contradict a simple view of the sovereign debt crisis which divides the euro zone into groups of core and peripheral countries and worries about financial contagion within the latter group.

Model Uncertainty in Panel Vector Autoregressive Models.

We develop methods for Bayesian model averaging (BMA) or selection (BMS) in Panel Vector Autoregressions (PVARs). Our approach allows us to select between or average over all possible combinations of restricted PVARs where the restrictions involve interdependencies between and heterogeneities across cross-sectional units. The resulting BMA framework can find a parsimonious PVAR specification, thus dealing with overparameterization concerns. We use these methods in an application involving the euro area sovereign debt crisis and show that our methods perform better than alternatives. Our findings contradict a simple view of the sovereign debt crisis which divides the euro zone into groups of core and peripheral countries and worries about financial contagion within the latter group.